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Judgments - Scottish & Newcastle Plc (Original Respondents and Cross-Appellants) V Raguz (Original Appellant and Cross-respondent)

HOUSE OF LORDS

SESSION 2007-08

[2008] UKHL 65

on appeal from: [2007] EWCA Civ 150

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

Scottish & Newcastle plc (Original Respondents and Cross-appellants) v Raguz (Original Appellant and Cross-respondent)

Appellate Committee

Lord Hoffmann

Lord Hope of Craighead

Lord Scott of Foscote

Lord Walker of Gestingthorpe

Lord Brown of Eaton-under-Heywood

Counsel

Original Appellant:

Stephen Jourdan

Marion Lonsdale

(Instructed by Sharpe Pritchard London Agents for LHP Law LLP)

Original Respondents:

Timothy Fancourt QC

Christopher Stoner

(Instructed by Eversheds LLP)

Hearing date:

9 and 10 JULY 2008

ON

WEDNESDAY 29 OCTOBER 2008

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

Scottish & Newcastle plc (Original Respondents and Cross-appellants) v Raguz (Original Appellant and Cross-respondent)

[2008] UKHL 65

LORD HOFFMANN

My Lords,

1.  At common law a lease is a contract between landlord and tenant which, if the landlord himself has or acquires an estate in the land, vests a leasehold estate in the tenant. The lease will ordinarily contain covenants to be performed by the tenant during the term of the lease and (in the absence of express contrary provision) these covenants mean what they say. A tenant who has covenanted to pay the rent during the term is liable to pay the rent during the term, whether or not he has assigned the leasehold estate to someone else.

2.  This rule was changed by section 5(2) of the Landlord and Tenant (Covenants) Act 1995, which provides that if a tenant assigns the demised premises, he is released from his covenants. But the change applies only to tenancies granted after the Act came into force on 1 January 1996. The common law continues to apply to earlier tenancies, but subject to restrictions contained in sections 17 to 20. For present purposes, the relevant restrictions are contained in the following provisions of section 17, which deals with the liability of a “former tenant” to pay a “fixed charge” (an expression defined by subsection (6) to mean rent, a service charge or a liquidated sum payable for a breach of covenant) after he has assigned the lease:

“(2) The former tenant shall not be liable under…the covenant to pay any amount in respect of any fixed charge payable under the covenant unless, within the period of six months beginning with the date when the charge becomes due, the landlord serves on the former tenant a notice informing him—

(a) that the charge is now due; and

(b) that in respect of the charge the landlord intends to recover from the former tenant such amount as is specified in the notice and (where payable) interest calculated on such basis as is so specified.

(4) Where the landlord has duly served a notice under subsection (2)…, the amount (exclusive of interest) which the former tenant or (as the case may be) the guarantor is liable to pay in respect of the fixed charge in question shall not exceed the amount specified in the notice unless—

(a) his liability in respect of the charge is subsequently determined to be for a greater amount,

(b) the notice informed him of the possibility that that liability would be so determined, and

(c) within the period of three months beginning with the date of the determination, the landlord serves on him a further notice informing him that the landlord intends to recover that greater amount from him (plus interest, where payable)".

3.  As appears from the facts stated in the speech of my noble and learned friend Lord Scott of Foscote, which I have had the privilege of reading in draft, the problem in this case arises from the fact that when a lease provides that the rent shall be increased from a specified date but the amount of the increase is not agreed or determined until a later date, the increase is for some purposes (but not others) treated as having accrued due retrospectively from the commencement of the rent review period. For example, it is treated as having been due retrospectively for the purpose of calculating interest on unpaid rent. On the other hand, it is not due for the purposes of bringing proceedings for arrears of rent or forfeiture until the amount of the increase has been determined.

4.  The question therefore is whether, for the purposes of section 17(2), an increase under a rent review is to be treated retrospectively as having become due from the commencement of the rent review period, thereby triggering the six month period during which the landlord must serve a notice on the former tenant or lose the right to claim under the covenant. In order to decide this question, it is necessary to consider the purpose for which Parliament introduced the requirement of notice. Plainly, it is to warn the former tenant in good time that the landlord intends to recover from him “such amount as is specified in the notice": subsection (2)(b). What is good time? Parliament has chosen the period of six months after any default. The landlord should not allow arrears to build up for a lengthy period and then descend upon an unsuspecting former tenant with a huge claim. On the other hand, there is no reason to require a landlord to give such a notice when the current tenant is paying the instalments as they fall due. He cannot say that he intends to recover anything from the former tenant when there is nothing in arrear to recover.

5.  These considerations point clearly to the words “the date when the charge becomes due” in section 17(2) meaning the date when the landlord would have been entitled to sue for the money. That seems to have been the view of the draftsman of the regulations which, under powers conferred upon the Lord Chancellor by section 27, prescribed the form of the notice under section 17: see the Landlord and Tenant (Covenants) Act 1995 (Notices) Regulations 1995 SI 1995/2964. The form required the landlord to say that the fixed charges specified in the notice were “due and unpaid” and that he intended to recover them from the former tenant.

6.  If that is the correct construction of section 17(2), then the additional sums payable under a rent review clause do not “become due” until the increase has been agreed or determined. It does not matter that for other purposes the increases are then treated as having accrued due at earlier dates. And I understand that none of your Lordships would have any difficulty in reaching this conclusion if it were not for the existence of section 17(4). To that subsection I must therefore now turn.

7.  Section 17(4) contemplates that a notice may have to be served under section 17(2) when the former tenant’s liability has not yet been determined. In such a case, the scheme is that the landlord must serve a notice in respect of that amount for which the tenant undoubtedly is liable, saying that he intends to recover that amount, but also giving him notice that the amount for which he is liable may be increased. Then, if the liability is determined in an increased amount, he must within three months of the determination serve another notice saying that he intends to recover the increased amount.

8.  It is very likely, I should have thought, that the situation in which the draftsman intended section 17(4) to apply was one in which, at the time at which a section 17(2) notice had to be served, there was a overdue but undetermined rent review. The landlord would then serve a section 17(2) notice in respect of the current passing rent but warn the tenant that he would be also claiming any increased rent when it was determined. That appears to have been the view of the draftsman of the notice regulations, who gave a “dispute concerning an outstanding rent review” as his first example of when section 17(4) would apply: see Note 4.

9.  The difficulty is, however, that this scheme of things is impossible to reconcile with the meaning which the draftsman appears to have given to “becomes due” in section 17(2). If “becomes due” means becomes payable, then a possible future increase on account of the rent review cannot be a liability at the time when the current rent falls due. The eventual determination cannot result in the tenant’s liability at that time having been, in the words of section 17(4)(a), “for a greater amount". It will be a new liability which becomes due at the date of the determination.

10.  Does this mean that we have to abandon the construction which we first thought should be given to section 17(2) and interpret “becomes due” as applicable to a debt which is not payable but which, on subsequently becoming payable, will be treated as having fallen due at an earlier date? That was the view of the judge and the Court of Appeal. But that produces some remarkably silly consequences. For example, as the judge pointed out, whenever there is an overdue rent review, a landlord who wishes to preserve his rights against a former tenant will have to serve a notice saying that nothing is presently unpaid and that he does not intend to recover anything from the former tenant, but that his liability may be determined to be for a greater amount. It is hard to believe that Parliament intended this to happen.

11.  In order to avoid this consequence, but to allow section 17(4) to apply in those cases in which Parliament (and the draftsman of the notice regulations) thought it would, Mr Jourdan offered a via media by which the obligation to serve a notice with the section 17(4) warning of future increases was limited to those cases in which there had been a default in payment of the current rent. This is a superficially attractive submission because it seems to be, in a general kind of way, what Parliament had in mind.

12.  It faces, however, what seems to me the insuperable difficulty that such a meaning cannot be derived from even the most purposive construction of the language of the statute. In section 17(2), the words “becomes due” mean either “becomes payable” or “is deemed to have accrued". They cannot have some intermediate or contingent meaning. If they means “becomes payable", the subsection cannot apply to a future increase on determination of a rent review. If they mean “is deemed to have accrued", the increase in rent will be deemed to have accrued whether the tenant was at the time otherwise in default or not. I do not see how the words can mean “ ‘deemed to have accrued’ if there was a default, but ‘becomes payable’ if there was not.”

13.  My Lords, the inescapable conclusion is that the draftsman of the Act had not thought through the consequences of the scheme he had adopted. In these circumstances, I think that the most orthodox approach, which is least likely to produce anomalies and injustice, is to stick to the interpretation of section 17(2) which it appeared on first reading to have been intended to bear. The consequence is that section 17(4) will largely have misfired; it is hard to think of cases in which a fixed charge within the meaning of the Act will have become actually payable without its amount having been determined. It means that Note 4 to the notice regulations, saying that it was applicable to the case of an outstanding review, was a mistake. But that consequence is better than requiring landlords to serve regular notices on former tenants saying that nothing is owing but there is a possibility that something may become owing in the future.

14.  In agreement, therefore, with my noble and learned friend Lord Scott of Foscote, I would allow S & N’s cross-appeal against the judge and Court of Appeal’s decision that the rent review increases were irrecoverable because of the failure to serve notices with the section 17(4) warning. That makes it unnecessary to deal with Mr Raguz’s appeal against the decision that, notwithstanding the irrecoverability of the increases, he was liable under section 24(1)(b) of the Land Registration Act 1925 to indemnify S & N against the expense of having paid them. If it were necessary to decide the point, I would agree with the judge, the Court of Appeal and my noble and learned friend Lord Walker of Gestingthorpe that he was so liable and I would dismiss his appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

15.  I have had the advantage of reading in draft the opinions of my noble and learned friends Lord Scott of Foscote and Lord Walker of Gestingthorpe. They differ on only one point on the first issue, which is as to the effect of the omission of para 4 from the form 1 notices of 11 November 1999 relating to the 1967 under-lease and 16 June 2000 relating to the 1969 under-lease.

16.  On this matter I agree with Lord Walker. For the reasons he gives I would hold that the effect of the omission of para 4 was that any instalments of the balance of the revised rent which had already notionally accrued were irrecoverable. This conclusion makes it necessary for a view to be taken on the second issue. Here too I am in agreement with what Lord Walker says in his opinion. For the reason he gives, adopting the conclusions of Lloyd LJ in the Court of Appeal, I too would hold that the scope of the indemnity under section 24(1)(b) of the Land Registration Act 1925 is not limited to payments which the assignor is legally liable to make. Hart J held that the position in which Scottish & Newcastle found itself was that it had to incur the expense of meeting the arrears irrespective of its strict liability to NCP in order to stem the onslaught of future liabilities: [2006] 4 All ER 524, para 109. On his findings there were good commercial reasons why, having considered the circumstances, the claimant acted as it did. This was an expense which was fairly and reasonably incurred, and in my opinion the amount which it has claimed is recoverable.

17.  I would therefore allow Scottish & Newcastle’s cross-appeal, subject to the modification that Lord Walker has suggested. I would dismiss Mr Raguz’s appeal.

LORD SCOTT OF FOSCOTE

My Lords,

Introduction

18.  Under the law as it stood before the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”) was enacted, tenant’s covenants in a lease could be enforced by the landlord not only against the current tenant but also against any previous tenant with whom the landlord was in privity of contract. The consequence of this rule was that an original tenant remained potentially liable under the covenants in the lease notwithstanding that he might have assigned the lease to a successor tenant and have had nothing to do with the demised property ever since. If the assignee of the lease, or some successor assignee, failed to pay the rent, or was in breach of some other covenant in the lease, the original tenant might find himself faced, out of the blue, with a demand for payment of unpaid rent, or for damages for breach of, for example, a covenant to keep the premises in a proper state of repair. The lease in question might be a lease for a term of years of considerable length and the potential liability of the original tenant would continue throughout the term. If the original tenant were corporate, those who had dealt with the grant of the lease or with its subsequent assignment, or both, might have long since left the company. Yet the potential liability would remain.

19.  The Law Commission, having in 1985 set up a Working Party to examine this feature of landlord and tenant law, published its Report on 29 November 1988. The title of the Report was “Landlord and Tenant Law: Privity of Contract and Estate". Paragraph 3.1 of the Report set out criticisms of the then current law and sub-paragraph (g) said this :

“(g)  Original tenants against whom covenants are enforced after they have assigned the lease are not adequately protected, nor do they have adequate means of reimbursement. They are not released even if the tenant in possession agrees materially to vary the extent of the liability, they are not entitled to notice of default and they have no right to take back possession of the property. Former tenants are therefore often deprived of the opportunity to limit their liability by taking prompt remedial action. Faced with demands they must meet, they are often unable even to have recourse to the property to recoup any losses.”

The 1995 Act was Parliament’s response to the criticisms that the Law Commission had made. The Act did not, however, adopt the Law Commission’s recommendations.

20.  Sections 17 to 20 of the 1995 Act addressed the problem of the continuing liability of an original tenant. It is the meaning and effect of section 17 that is in issue in this appeal. The section (omitting those parts that are not for present purposes material) provides as follows :

“17(1) This section applies where a person (“the former tenant”) is as a result of an assignment no longer a tenant under a tenancy but -

(a)  …. ; or

(b)  (in the case of any tenancy) he remains bound by [a covenant of the tenancy under which any fixed charge is payable].

(2) The former tenant shall not be liable under … the covenant to pay any amount in respect of any fixed charge payable under the covenant unless, within the period of six months beginning with the date when the charge becomes due, the landlord serves on the former tenant a notice informing him -

(a) that the charge is now due; and

(b) that in respect of the charge the landlord intends to recover from the former tenant such amount as is specified in the notice and (where payable) interest calculated on such basis as is so specified.

(3) ……..

(4) Where the landlord has duly served a notice under subsection (2) …, the amount (exclusive of interest) which the former tenant … is liable to pay in respect of the fixed charge in question shall not exceed the amount specified in the notice unless -

(a) his liability in respect of the charge is subsequently determined to be for a greater amount,

(b) the notice informed him of the possibility that that liability would be so determined, and

(c) within the period of three months beginning with the date of the determination, the landlord serves on him a further notice informing him that the landlord intends to recover that greater amount from him (plus interest, where payable).

(5) ……

       (6) In this section -

        “fixed charge", in relation to a tenancy, means -

(a)  rent,

(b)  any service charge defined by section 18 of the

Landlord and Tenant Act 1985 (the words ‘of a dwelling’ being disregarded for this purpose), and

(c) any amount payable under a tenant covenant of the tenancy providing for the payment of a liquidated sum in the event of failure to comply with any such covenant;

“landlord", in relation to a fixed charge, includes any person who has a right to enforce payment of the charge.”

21.  It is convenient at this point, although I shall later have to refer to the facts in more detail, to indicate the nature of the problem that has given rise to this litigation. Many leases, where the consideration for the grant of the lease includes the reservation of a substantial rent, contain rent review clauses. These rent review clauses usually prescribe the procedure for the determination of the revised rent. The prescribed procedures vary from lease to lease and some are more complex than others but all involve the possibility of delay before the determination of the new rent becomes final. There is, therefore, the possibility of an interval, which may be quite a lengthy one, between the review date and the date on which the amount of the revised rent is finally determined. None of this need, for section 17 purposes, matter if the lease makes clear that the amount of additional “rent", attributable to the interval between the review date and the date on which the amount of the revised rent is finally fixed, does not become due until the latter date. A problem arises, however, if the lease says that the rent payable as from each review date is to be the revised rent. Take the case of a lease in which the rent is expressed to be an annual rent payable quarterly on the usual quarter days and in which the revised rent is expressed to be payable as from the review date, and suppose that, for two years following the review date, rent at the pre-review level is duly paid, the revised rent having not yet been determined. Does section 17(2), if the current tenant is not the original tenant, require the landlord within six months of each quarter day during the two years to serve a section 17(2) notice on the original tenant in order to keep alive his (the landlord’s) right to require the original tenant to pay the additional rent in respect of that quarter day if the current tenant should, after the revised rent has been determined, fail to do so? And, if section 17(2) does so require, what is the section 17(2) notice to say? Can it say that a sum due by way of rent is payable but unpaid although there is nothing currently payable but unpaid? Section 17(2) requires the notice to inform the original tenant that rent payable under the lease “is now due” and that the landlord intends to recover from the original tenant “such amount as is specified in the notice". It is common ground that, in such a case as is being contemplated, the amount specified would have to be “nil". How can “nil” be an amount that is “now due” and how can “nil” be an “amount” that the landlord intends to “recover” from the tenant? The obvious and commonsense answer to these questions, as it seems to me, is that the statutory reference to rent that “is now due” is a reference to a sum of rent that is currently - “now” - payable and cannot be read as a reference to an unquantified sum of rent that at some unknown date in the future will become quantified and, accordingly, payable. But, on the other hand, if no section 17(2) notice is served, the original tenant will not have been put on notice that a review date has passed, that the determination of the revised rent has not been finalised, that additional rent for the period between the review date and the determination of the new rent has been accruing and will continue to accrue at a rate as yet unknown and that the original tenant will be liable to pay this additional rent if the current tenant fails to do so. Is this situation consistent with the intended purpose of section 17? The issue raised by these questions is not the only issue raised by this appeal, but it is, in my opinion, the most important one.

The facts

22.  I must now turn to the facts which, I am happy to say, are not in dispute and are set out in the Agreed Statement provided to your Lordships by the parties. Scottish & Newcastle PLC (“S & N”) became the original tenants of premises in Abbey Street, Leicester, under two underleases, one dated 17 March 1967, the other dated 7 March 1969 The original underlessor was Colston Property Holdings Ltd. Each of the underleases was for a term of years expiring on 22 March 2062 and included covenants by S & N to pay the rent in advance on the usual quarter days. There was also a tenant’s covenant not to assign or underlet without the prior written consent of the landlord, such consent not to be unreasonably withheld. Each underlease contained provision for a rent review every 14 years: “The said yearly rent … shall be revised at the end of [every 14 years] …". Each underlease contained a forfeiture clause in the event, inter alia, that

“… the said rent hereby reserved or any part thereof shall be unpaid for twenty-one days after any of the days hereinbefore appointed for payment …”

It is plain that a failure on the quarter days following a rent review date, but before the determination of the amount of the revised rent, to pay rent at a higher level than the pre review date level could not possibly be thought to trigger the forfeiture clause. The reference to “… the said rent hereby reserved …” could not be construed as including an as yet undetermined increase in the amount of the pre review date rent.

 
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